Ovation’s Income Service – Utilising Capital Gains Tax Allowances
Much has been made in the personal finance pages of newspapers about the changes to Capital Gains Tax (CGT) in the March 2008 Budget. Whilst the industry has been analysing the changes, a number of ideas have come about as to how this may benefit individuals looking to take an income from their investment portfolio.
What are the changes?
Prior to the 2008 Budget, CGT was calculated on an
individual’s income tax position (eg: non taxpayer; basic rate taxpayer;
higher rate taxpayer) and the length of time the asset was held. For
assets held for a long period of time, this could have potentially
reduced the tax payable in some circumstances to 10%.
Since the 2008 Budget, CGT is now charged at a flat rate of 18%, regardless of an individual’s personal tax position, and irrespective of how long the asset has been held. However, the first £9,600 of the gain each year is free of tax.
How can this increase my tax-free income?
Ovation Finance are launching a service which can provide a
monthly tax-free income from investments by utilising your annual CGT
allowances. The service will structure your investments in a manner that
allows units to be encashed on a monthly basis to provide an income
which can be offset against your CGT allowance.
Unlike traditional income bonds provided by insurance companies, this approach does not charge any of the monthly units enchased to income tax, so you could see a corresponding reduction in the income you pay on your investment income.
We’ll calculate how much of the CGT allowance you’ve used, how much is remaining, and also utilise your ISA allowances where available to increase the tax-efficiency of your portfolio. If you’ve already used your ISA allowance for this year we can ‘drip-feed’ money into allowances in coming years to maximise the tax efficiency of your portfolio.
Your assets will be held on a ‘wrap’ platform which allows access to over a thousand collective investment funds from a large number of managers. This allows us to build a bespoke income portfolio aligned to the levels of risk you think are suitable for you, and automate the income paid to you each month.
How will this affect my investment choices?
There are many factors to consider when addressing the
suitability of an investment portfolio, such as your present and
expected future tax status; income or growth requirements; ability to
switch funds; size and term of investment. As always, this decision
should be based purely on your personal circumstances and objectives,
and advice should be sought on the suitability of any investment.
Market Unrest
‘Crash’ is a dramatic sounding word – add it to stock market and it becomes financially worrying, even to those who aren’t all that interested in finance. Then there are the press commentaries that use descriptive words like ‘slide,’ or ‘plunged,’ or ‘fall sharply,’ in reference to financial markets. ‘Correction’ seems almost benign by comparison. All these words have been bandied about of late. All because of the American sub-prime mortgage crisis a slowing in the American and global markets, and the an increase in inflation brought on by rising fuel and food costs
The worry through recent market woes over the last 6 months has been the American consumer and what impact lower spending there will have on the rest of the world.
For the second time this year equity markets went into freefall as shareholders, traders – and hedge funds – went into overdrive, dumping their investments in fear that profits were about to fall further than anyone expected.
Stability has not come to the markets yet, presenting good opportunities for investors the current high level of volatility expected to continue over coming weeks – and possibly even months. In a positive environment, markets generally over-react to create a boom. In a negative environment, the same happens but in reverse. News stories in both directions are likely to cause large swings in prices for a while to come.
Analysing the whys, however, does not answer the questions for you and investors like you - which is most likely ‘Will it fall further and if, so, shouldn’t I just sell and take my loss?’
The first part of this question – as we indicated above – is almost impossible to answer. The future is never guaranteed in equity markets, although there will be many commentators arguing both for why it should fall further and for why it will soon return to its upward trajectory. Some of them will be right but as yet we have no idea which ones.
The latter part is easier to address, however. Volatility and market surprises are at the heart of equity investing and this most recent event really serves to highlight that point. It should also remind you of the benefits of diversification and of making sure your portfolio is set up to deal with such events.
Good portfolio planning is vital to stop you having to pull money out of the market at times when things look bad. If you are forced to do so, you consolidate your loss and feel the pain – and if the market rebounds after you have withdrawn, you miss out on that rise. However, if you have a widely diversified portfolio and reserves to draw on when emergencies hit, you can stay invested and sit back, waiting for normality to return. Yes, if markets fall further, you may have to wait a little longer before your investment gets back to where it was but at least you have the chance for that to happen. If you pull out, your money is already lost.
Equities and equity-based funds are never to be considered as short term investments. If the ups and downs of the last weeks are too unnerving for you, then you should perhaps think about moving some of your equity holdings into other less volatile asset classes. This would help to smooth out some of those movements.
At times like this, it may be worth remembering why you made your investment – and be comforted with the thought that, if your portfolio is balanced and your needs are unchanged then for the long term investor, this news should be nothing to get too worried about. If you want to take a closer look just to make sure, simply give us a call on 0117 9424 333.
Global Market Round-up
UK
It was another volatile quarter for UK equities. The two
dominant themes were the strengthening oil price and continued concerns
regarding the banking sector.
As a result of the price of a barrel of oil surging past $140, the best performing sectors were Oil Equipment & Services and Oil & Gas Producers. The best performing large cap share was producer Tullow Oil whose shares gained a massive 44.6% during the quarter.
By contrast, Financials – in particular the Banks, were sold down sharply as the
consequences of the subprime meltdown and the credit
crunch continued to reverberate. The quarter’s biggest large cap loser
was HBOS, as the shares shed a massive 50.7% of their value.
Credit concerns also contributed to severe falls in value for listed property companies and REITS (Real Estate Investment Trusts). Well known names such as British Land, Hammerson and Land Securities all experienced share price falls in excess of 15%.
US
Wall Street started the quarter on a positive note with some
signs that the credit markets were starting to function, in limited
ways. Unfortunately, oil hit new highs, inflation concerns increased
and financials could not offer any reassurance. This all contributed to
the worst first half to the year for US equities since 1970.
Economic data was generally negative through the quarter, with consumer confidence falling, continued housing market problems and rising unemployment. Inflation continued to creep higher and the Federal Reserve became increasingly hawkish in response. This set expectations that rate rises are more likely than not in the coming months.
Further writedowns and credit concerns were a worry at Lehman Brothers whose share price almost halved in value over Q2.
The imbalance between supply and demand continued to push house prices down, particular stress was seen in areas such as Florida and Arizona.
Europe
Record oil prices meant that the oil and gas sectors
registered the biggest gains. Basic materials, industrial metals and
chemicals were also in positive territory, but consumer related sectors
lagged. Financials were smashed, with the FTSE AW Europe ex UK (Banks)
Index losing 18.42% over the quarter.
Germany, until recently the boiler house of European growth, endured falling retail sales, consumer confidence and investor confidence, combined with the first increase in unemployment for more than two years.
UBS endured a nightmarish quarter. Europe’s biggest casualty of the US mortgage crisis suffered $38bn in subprime related writedowns between Q307 and Q108. The Swiss wealth manager has more than halved in value year-to-date.
Total of France added 11%, supported by record oil prices, while Italian oilfield services company Saipem also benefited, gaining 13%.
Japan/Pacific Basin
Japanese equities ended the quarter in positive territory,
outperforming their global counterparts. Stocks benefited from a
reasonable set of corporate profits, with the exception of financials;
driven by a stronger US Dollar against the Yen and occasional bouts of
optimism in respect of the outlook for the US and global economies.
The majority of Asian bourses lost ground over the three months as investors continued to worry about the US slowdown, surging oil prices and rampant inflation at both global and domestic levels.
In China, a reduction in stamp duty on stock trades and the easing of price controls by the Government proved positive temporarily, but overall Chinese stocks continued their descent on concerns about further tightening measures. The Shanghai Composite lost 21.21%, while in Hong Kong, the benchmark Hang Seng fell 3.27%.
And Finally ...
For those looking for somewhere different to invest: Rowan Dartington, the fund management and private client stockbroking business, has launched an Enterprise Investment Scheme (EIS) approved Investment Fund, targeting Pre-IPO companies – those private companies who are looking to put their shares onto a stockmarket, but are looking for some more funding to get them there.
Launched in March 2008, the Isambard Fund invests in companies that are seeking to float, typically on the Alternative Investment Market, within the next 9 months. No more than 20% of the total value of the Fund will be invested in any one company.
The Fund will target companies that have significant intellectual property that is not yet recognised in value terms, generally because the companies require another round of funding to roll out the sales and marketing of products which have already been developed beyond “proof of concept” stage.
Rowan Dartington are particularly interested in the biopharmaceutical, knowledge-based engineering and renewables / clean technology sectors.
EIS approval means investors get 20p in the pound tax relief (once the fund is 90% invested), and any gains or dividends are tax free provided the company that the fund is invested in continues to qualify for at least 3 years.
Returns from the fund should be obtained when the companies float, or alternatively by return of the shares after 5 years if it is not possible to sell the shares in the meantime.